Performance Management: Analyzing and Monitoring Charter ......National Charter School Resource...
Transcript of Performance Management: Analyzing and Monitoring Charter ......National Charter School Resource...
Performance Management: Analyzing and Monitoring Charter School Finance
Part 1
TAMMIE KNIGHTS:
Good afternoon everyone (or good morning for some folks
out there). My name is Tammie Knights from the National
Charter School Resource Center, and I’m pleased to
welcome you to the webinar Performance Management:
Analyzing and Monitoring Charter School Finance.
The Resource Center is funded by the Department of
Education’s Charter Schools Program and serves as a
national center to provide resources, information, and
technical assistance to support the successful planning,
authorizing, implementation, and sustainability of high-
quality charter schools; to share evaluations on the effects of
charter schools; and to disseminate information about
successful practices in charter schools.
I want to quickly remind you about our webinar platform.
You can listen to the audio portion either through your
computer or over the phone. If you do join by phone,
please mute your computer speakers to prevent an echo
effect as we are recording this webinar for future use. If you
are not prompted to enter your phone number, please dial
the number that is listed in the chat. For any questions you
have, please enter them in the chat throughout the
webinar.
For your information you will find the PowerPoint to today’s
presentation, as well as an additional resource, in the box
located directly under the chat. If you click on that—hit
Download File—another Web browser pops up for you to be
able to download the file.
As I said, as a reminder, the webinar is being recorded, so
to ensure audio quality, I have muted all of the participants.
If we need to come to a time for you to be able to speak
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—2
[while] being in the chat, you can press *6 to unmute and
speak over the phone.
Today’s webinar will feature Whitney Spalding Spencer, who
is NACSA’s [the National Association of Charter School
Authorizers (NACSA)] director of authorizer development,
and Ben Aase, principal at CliftonLarsonAllen LLP. [This is]
an interactive presentation where we’ll have several
questions to ask you as an audience and when those come
up, we will put a question over the PowerPoint presentation
for you to be able to participate, and then we’ll go back to
the presentation. And with that said, I will turn it over to
Whitney and Ben.
WHITNEY SPALDING SPENCER:
Thanks, Tammie. As Tammie mentioned, this is Whitney
Spalding Spencer at the National Association of Charter
School Authorizers, and we’re pleased today to be able to
share with you our core performance framework. I’ll talk a
little bit more about what that is in a moment.
Slide 1
To start with our agenda for today, we’re going to give an
overview of the core financial performance framework that
NACSA has created and in which CliftonLarsonAllen has
certainly been a key partner. Sort of through that overview
and later in the webinar today, we’re going to talk about a
case study of an actual charter school’s finances and talk
about, you know, based on what we’ve learned about the
performance framework, how would we assess this school’s
quality? And then we’ll talk more about actually
implementing the performance framework.
Once you’ve assessed the school’s quality based on the
performance framework measures, how do you follow-up,
how do you monitor the school’s performance, and how do
you ultimately make decisions about what to do with that
school?
Slide 2
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—3
This is NACSA’s core performance framework and
guidance. This is a resource that we recently published—
really only just a few weeks ago—that we were able to
create through a federal grant. We are a national leadership
grantee in each of those three areas. But we find that really
the core performance framework, particularly the financial
piece, is important not just to authorizers but is useful to
anyone who is of value [inaudible]—whether it be at the
school level, an authorizer level, or another position.
The core performance framework and guidance, just to note,
is not currently in the File Share section of the webinar, but
we would love for you all to get a copy of this, so we will
send an e-mail following the webinar with information on
how to request a copy, or you can e-mail, if you remember it,
otherwise we’ll email you, [email protected], so
that’s [email protected]. And if you didn’t get that
down, we’ll shoot you an e-mail later to let you know how
you can get a copy of this resource which we’re going to
walk through today.
Slide 3
The core performance framework actually has three
sections. The performance framework, just to step back a
little bit, is an accountability tool that every authorizer should
have that allows them to set clear, transparent expectations
for the charter schools in their portfolio to let them know how
they have to be performing in order to be renewed and to
continue operating. That accountability system needs to
include three sections: academic, financial, and
organizational performance. Organizational: “Is the
organization effective and well run?” Today we’re really
going to focus on that financial piece.
Now I’m going to pass it over to Ben, who is going to walk
through [it] in a little bit more detail.
Slide 4
BEN AASE:
Thank you, Whitney. And before we do that, Tammie, can
we go to the polling question number one? I’m interested in
finding out who is in the audience here. [pause]
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—4
TAMMIE KNIGHTS:
Yes.
BEN AASE:
Thank you. [pause]
TAMMIE KNIGHTS:
You seeing the results there, Ben?
BEN AASE:
I am; good. Can you expand the pod a bit so I can see them
a little bit better?
TAMMIE KNIGHTS:
That’s what I’m trying. [pause]
BEN AASE:
Okay.
TAMMIE KNIGHTS:
If people are there, I can broadcast it. [pause]
WHITNEY SPALDING SPENCER:
It looks like most people—there it goes. [pause]
BEN AASE:
You able to bring that back up, Tammie?
TAMMIE KNIGHTS:
Sorry. Yeah, there we go.
BEN AASE:
Okay.
TAMMIE KNIGHTS:
There we go.
BEN AASE:
All right; excellent, thank you. Okay. We’ve got a pretty good
mix of folks. Some charter school leaders, some charter
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—5
school authorizers, other school employees, a small number
of SCA representatives it looks like, and a whole bunch of
other people too. This is great, that’s excellent, and it does
help quite a bit with context as we move through today’s
material, so thank you.
A few, just sort of ground-setting frequently asked questions
that we want to make sure that we cover here before we
dive into the framework itself.
Who should use the financial performance
framework?
Where do you get the information?
And in that last point there, which we’ll dig into a bit
later, in terms of using schools audited financial
statements, it’s a source of information. So they’ll be
context throughout this discussion addressing all of
these questions.
But [I] just want to start by saying that, well, the primary
purpose of the framework is certainly to assist authorizers in
developing and implementing their own frameworks. I would
suggest that its content and approach can be useful from
another perspective, a number of perspectives, whether
you’re a school leader, I’d say a CFO [chief financial officer]
or a business manager perhaps, a board member, a state
agency representative, or another individual who’s involved
in or impacted by the results of a charter school. Whatever
your perspective, the framework ultimately really provides a
tool that recognizes schools that are currently in or starts to
mature in more [inaudible] standards make their way into the
taxonomy. This can also be a good tool for championing
your financial successes too.
The framework was derived through a review of model
authorizer practices, charter school lender guidance, and
expertise drawn from the field. You’ll see in the full framework
and guidance, if or when you receive a copy, a number of
folks have their hands in this work. CliftonLarsonAllen is just
one of the many organizations that contributed to this.
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As a point of reference, CliftonLarsonAllen is a national
public accounting firm. We’re about the 10th largest firm in
the country, and we do quite a bit of work with state and
local government agencies, quasi-governmental entities,
K–12 districts, charter schools, and basically sort of up and
down the P–20 education horizon. We’ve been a long-time
partner of NACSA and are very proud of the work we’ve
done here.
The framework does not specifically mirror any single source
of information or perspective. It was created to provide a
clear picture of a school’s past financial performance, its
current financial health, and [its] potential financial trajectory.
Using the framework, I want to say this upfront, does require
information sourced largely from independent annual
financial audit[s] that use, ideally here, accrual-based
accounting. Cash-based audits within this framework will
prove problematic. And we’ll get into some of the
supplemental information that is useful to both using the
framework as is and that is also, I’d say, instrumental in
additional analysis, follow-up, and action or decision making.
This is of today’s webinar. You don’t have to go get these
things right now. We’ve got a small case study; it’s
embedded here as a PDF, but I can tell you that all of the
information that we need to engage in that through this
webinar is included in basically a one page summary. But,
otherwise, you’ll hear various financial statements
referenced throughout this webinar: audited balance sheets;
income statement; statement of cash flows; notes to the
audited financial statements; board-approved budgets with
enrollment targets; actual enrollment information; and also
some supplemental information, such as annual debt
schedules; and information such as that.
I just want to say that throughout this webinar and
throughout the guidance, financial statements are referred to
in the common for-profit nomenclature. Statements reported
in nonprofit or governmental audits may use slightly different
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—7
names depending on the financial statement, but there’s
also in the guidance a good table that helps you work
through the differences, depending on how audits are
performed within your state.
With that, the framework engages both near-term financial
health and longer-term financial sustainability and includes
five main levels of information that you see broken out on
the screen here: indicators, measures, metrics, targets, and
ratings. I want to take a minute [inaudible] categories of
financial performance. Basically, broken down into two
categories: near-term and longer-term sustainability.
Right below that within each indicator are a number of
measures. Now these are the general means to evaluate an
aspect of an indicator. The example you see here is current
ratio. Eight measures are used in the framework, current
ratio being one, unrestricted day’s cash, enrollment
variances, debt default, total margin, debt-to-asset ratio,
cash flow, and debt service coverage ratio. So those are the
eight measures within the framework that we’ll also walk
through here today.
If we move down one level, we then get to metrics, which is
basically an articulation of the method for quantifying a
target. In this example, current ratio is equal to the school’s
current assets divided by its current liabilities. So [it]
basically provides the math as logic behind the
measurement.
Moving down again to targets. Targets are the thresholds
that signify success in meeting the standard for each
specific measure. To this example, a current ratio of greater
than 1.1. Each target and formula is detailed in the
framework, and the basis for forming many of the targets
was on industry standard, at least to the extent that they
exist. Other financing and funding environments have been
considered and included in instances where we may see
moves away from an industry standard where necessary. At
the end of the day, whatever your perspective, whatever
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your role, this framework ought to serve as a good jumping
off point for customization as you see fit.
Let’s move into ratings and talk about those for a moment.
For each measure, a school receives one of three ratings
based on [an] evaluation of the established metrics:
Meet standard. In this case the school’s performance
does not signal a financial risk to the school and
meets the authorizer’s standard.
Does not meet standard—and you can see these
layered vertically here on the table. Does not meet
standard. In this instance, the school’s performance
on this component signals a financial risk to the
school and does not meet the authorizer’s
expectation.
Falls far below standard. In this instance, the
school’s performance on this measure or target
signals a significant financial risk to the school and
also does not meet the authorizer’s expectation.
I’d like to keep going here. The framework includes two
indicators or general categories to evaluate a school’s
financial performance. The first that you see on the left are
near-term indicators. This portion of the framework, which
we’ll walk through first, tests the school’s near-term financial
health and is designed [inaudible] schools that fail to meet the
standards may currently be experiencing financial difficulties
and/or may be at high risk for financial hardship in the near-
term, requiring additional review, corrective action, or analysis
whether you’re an authorizer or another vested party.
In the second group of indicators—sustainability. The
framework also includes long-term financial sustainability
measures that are designed to depict a school’s financial
position and viability over a greater length of time. Schools
that meet the desired standards demonstrate a low risk of
financial distress in the future, while schools that fail to meet
the standards may be at high risk for financial hardship in
the future.
Slide 7
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—9
Now are there any questions before we dig further into the
measures in detail?
I’m going to take a look, and the way I’d like to handle the
questions [is as follows]: I’m going to try to field those which
are certainly directly related to the material at hand, and I
want to acknowledge we received a number of questions in
advance of the webinar as well. To the extent that I can
speak to those in the context of the framework here, I will.
As an alternative, I’d like to suggest that for those we don’t
address during the webinar itself that my team perhaps
composes some written responses and can distribute those
to the full group as a follow-up takeaway to this webinar as
well.
I’ve got a question here about the overlap between
indicators in the near-term category and [the] sustainability
category. And I guess my short answer to that is, yes, there
is some overlap. Now, it weighs, and they’re also designed
such that let’s say a school is financially healthy in one
measure, but if you were to look at that measure alone or
perhaps a couple of measures, you may miss something. So
they’re complementary and overlapping in this sense that
they do provide a pretty good comprehensive viewpoint of a
school’s financial health and are intentionally designed to
have some of those backstopper or fact catches that you
might otherwise miss.
Well, let’s get started with the near-term measures. Now, I
do want to refer you to—if you look down in the File Share
portion of the screen there—there’s a document called CLA
Case Study, and what you’ll see here is a one-page
document. We’re going to keep this pretty simple,
recognizing that we’re somewhat limited engagement with a
webinar format. But what you’ve got here is basically a
summary of key financial information for a school, and I’m
going to call this school the Academy for Technical
Education, let’s say. And just starting at the top I want to
orient you just briefly. You’ve got three years of financial
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—10
information, with the most current year in the left-hand
column, in this case FY or fiscal year [20]11, and in fiscal
year [20]10 and fiscal year [20]09.
Starting at the top, you’ve got some balance sheet
information, [which is] comprised of the few main areas of
assets, liabilities, and net assets, with each row also
lettered. And then below that just a few top line excerpts
from this school’s statement of activities or income
statement: total revenue, total expenses, and change in net
assets. And then down at the bottom under the heading
analysis, this is where you’ll see the measures that we’re
going to walk through, both calculated—well, basically,
calculated here for each of the fiscal years. That’s where the
financial results up above feed into the analysis at the
bottom, which then ties to the measures within the financial
performance framework.
I’m going to reference that in very [inaudible]. Near-term
measures, we’re going to start with those.
The first is current ratio, which measures a school’s ability to
pay its obligations over the next 12 months—over the next
year. More specifically, it’s defined as the relationship
between a school’s current assets and current liabilities.
This information is sourced from the school’s audited
balance sheet.
A current ratio greater than 1.0 indicates that the school’s
current assets exceed its current liabilities, thus indicating an
ability to meet its current obligations. This is a very common,
key fundamental financial performance indicator—really
across a number of sectors. A ratio of less 1.0 indicates that
the school does not have sufficient current assets to cover
its current liabilities and is not [inaudible] for a current ratio is
that it should be a minimum of 1. That’s at least what you
may hear quite often in terms of norms or standards.
Now, that said, an upward trend of a current ratio that is
greater than 1 indicates greater financial health, hence the
greater than or equal to 1.1 target to meet standard, or a
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National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—11
school maintaining a current ratio between 1.0 and 1.1 but
with a positive [inaudible] aspects or multiyear measures
that help compliment and round out the perspective on
financial health. You then see below corresponding
boundaries and trend implications for not meeting standard.
And lastly there falls far below standard. Excuse me, the
current ratio of less than or equal to 0.9 is considered a fall
far below standard.
Here under the Analysis Section, you can see it pulled down
the math from up above and ran a current ratio for both the
current and the two prior years. So I want to ask you, go
ahead using the polling tool, what do you think? Does the
school meet standard, not meet standard, or does it fall far
below standard? [pause]
The results are pouring in. Thank you, folks. [pause] All
right; I’m going to go ahead and broadcast these results.
The standard actually by a pretty long shot is its current ratio
in each of the last three years is well over that 1.1 threshold,
so 4.57, 4.10, and then 3.03 for the past three years,
respectively. Thank you all for taking a poll there.
Thanks, Tammie. I’m going to keep us moving. We’re going
to hit on some additional metrics here.
Number two, unrestricted day’s cash. This basically tells
you how many days a school can pay its expenses without
another inflow of cash. You’ll need your audited balance
sheet and income statement for this. I’ll also want to note
that in the calculation there, you’ll see that depreciation
expense is removed from the calculation because it is not a
cash expense. That’s the explanation there. When we’re
talking about cash, we only want to consider cash
expenses.
The framework uses at least one month of operating
expenses—cash on hand as a standard for [a] minimum
measure of financial health. Now that said, due to the nature
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of charter school cash flow and the sometimes irregular
receipts of revenue, a 60-day threshold was set for schools
to meet the standard. Still, I should say, schools showing a
growing cash balance from prior years and then have
enough cash to pay at least one month expenses also meet
the standard. Finally, if a school has fewer than 15 days of
cash on hand, it will not be able to operate for more than a
couple of weeks without another cash inflow. It could be at
risk for more immediate financial difficulties.
If you take a look at our case study again, the Academy for
Technical Education, and you look down at the bottom of
day’s cash, how’s our school doing? [pause]
Hmm, Tammie, it looks like the poll is showing it’s closed for
some reason. Got a solution on that? There we go, now
they’re coming in. Thank you. [pause]
All right; excellent. Let’s go ahead and just broadcast those
results. Looks like folks are zeroing in: You’re right; [the]
school definitely meets the standard. We’re starting with
short-term assets relative to short-term debt. We know that
they’ve got a good volume of cash on hand, so we’re
starting to be able to understand and even tell the financial
story underlying this particular school. Thank you.
WHITNEY SPALDING SPENCER:
Ben, before we move on, we’ve got a question on—if you
remove noncash expenses from the unrestricted day’s cash
calculation?
BEN AASE:
Yes. If you’ve got other noncash expenses, really you do
just want to get at cash requirements, right? So, yes. That’s
a great question, a great clarification there. Thank you.
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—13
Enrollment variance; this a point where perhaps we depart
from traditional financial statements, just a bit as we look at
these measures, but it’s a very important one, and it’s given
rise to a lot of lively discussion in different states and
environments where we’ve introduced this framework. But at
the end of the day, it is, I believe, a very key measure. It tells
you whether or not a school is meeting its enrollment
projections, which, as most of us know, is often the key
driver of revenues and financial sustainability. Enrollment
variance, which is intended to measure and depict actual
versus projected enrollment, is [inaudible] to make sure to
capture early in the school year to the extent possible.
Now, I do want to recognize the schools, let’s say if you then
five years old, may have greater fluctuations in their
enrollment numbers because they’re still establishing
themselves within their community. But that being said,
mature schools with large, unexplained enrollment
fluctuations may be in financial distress if they’re unable to
adjust—
Slide 11
Part 2
BEN AASE:
—[enrollment] variances not only a way to evaluate a
school’s financial health but also to monitor how savvy the
school’s board and management are at forecasting. While
enrollment variance is a primary measure of financial health,
it can also be seen as a secondary measure for
organizational aptitude; and I think this is actually probably a
good point as well to just speak briefly to the, as intended to.
gauge and measure financial health, financial position, and
financial performance from a financial standpoint.
This is the one measure that starts to get into [inaudible]
questions of financial management, but the vast majority of
things you may be interested in about how a school
manages its finances and the extent to which those support
a quality operation are really going to be bound within the
organizational component of NACSA’s core performance
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—14
framework. For the study school, we don’t have actual
enrollment information for this, so unless there are any
specific questions about this measure, we’ll keep moving.
I do see a question here from Brian Flannerer, an
observation really, which is that it seems like the variance
might be 5 percent, 15 percent, et cetera. I do agree with
you; I acknowledge that, Brian. The variance, if you were to
say, the variance could or should be measured perhaps in
the variance from 100 percent, if you will, so you are correct
that would basically be the corollary if measured a bit
differently there.
But at the end of the day hopefully, [you’ll be able to] tell this
is a simple measure of whether or not a school is meeting its
debt obligations or perhaps its debt covenants.
I do want to just say upfront, sort of a big picture comment,
when we talk about meeting debt obligations or covenants,
for the most part we’re generally not talking about whether
or not the school is making its ongoing payables—small bills
of that nature. We’re really interested in sizable debt that,
let’s say, is material to the financial health and condition of
the school, so think about things like mortgages, bond
obligations, or other significant capital-related debt
instruments. And, also, I wanted to acknowledge that
because of the variation in statutory limitations on schools
holding debt, each authorizer should determine the exact
application of this definition. But that being said, knowing
whether or not a school is meeting and current on its debt
obligations and covenants is certainly an important thing.
So, and the last sort of nuance here, you may consider a
school to be in default only when it’s, let’s say, not making
payments on its debt or—now, for this one you’re going to
need to look at the notes to a school’s audited financial
statements. It will not be embedded within these numbers,
and this is where reading those notes, which is a good habit
and a good practice to begin with, will really help to uncover
some determination on this measure. For our case study
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National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—15
school, because we summarized top-level financial data into
a one-pager here, we didn’t send you a full notes to financial
statements and have you go digging for any debt default.
Unless there are questions, I’d like to move us on to the next
metric.
We’re through the near-term measures: we started to paint a
picture of this school’s financial health; we’ve taken a look
again at current ratio of day’s cash, and then we’ve
discussed a couple of other metrics that make up those
near-term indicators. It’s now time to turn our attention to the
sustainability measures: longer-term measures designed to
gauge a school’s financial position and viability over time.
Slide 13
First up is total margin, which measures whether or not a
school is living within its available resources on an annual
basis or, more specifically, whether a school operates a
surplus. Schools can operate at a deficit for a sustained
period of time without eroding their financial health. You’ll
note that the framework uses two calculations: One, a single
year total margin and the other an aggregated three-year
measure. The latter is really helpful for measuring the long-
term stability of the school by smoothing the impact of
single-year fluctuations in margin.
In terms of a basis for the target level, preference in most
industries is that total margin is positive, but organizations
can and do make strategic choices to operate at a deficit for
a given year in order to incur, perhaps, large operating or
other planned expenditures. So you want to keep that in
mind.
The framework’s targets do allow for this flexibility over a
three-year time horizon but do require a positive total margin
for the most recent year in order to meet the standard. And
then lastly, a margin in any year of less than negative
10 percent, and that is 10 percent of total revenues, or an
aggregate three-year total margin less than or equal to
negative 1.5 percent falls far below standard. Again,
allowing for some flexibility in terms of time horizon, in terms
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National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—16
of financial performance over that time horizon, and really
putting a fairly nuanced lens on this particular measure.
Because of the trend component of this measure, you’ll also
need three years of audited income statements to run the
calculations.
Let’s turn back to our case study for a moment here, and
here’s where you’ll really take a look at that statement of
activities section there, which feeds in down below to the
profit margin calculation. How does our school do against
the standard? And, Tammie, if you could please, cue up
number four there. [pause]
All right; thank you. We’ll broadcast the results here, and this
one I’m not surprised by. We’ve got the more of a mix of
perspectives or respondents here in terms of whether or not
the school meets the standards, although it looks as though
the greatest number of participants here believe that the
school falls far below the standard, which is actually correct,
so less than or equal to negative 1 percent. They’ve been
running a deficit for the past three years: Three years ago
about 9 percent, then 8 [percent], and then most recently
14 percent, so that really gets to the latter element of the
falls far below standard in that the school’s most recent total
margin is less than negative 10 percent. Whatever my
perspective might be, I’m going to want to know what the
story is behind that deficit, recurring deficit.
Any questions? All right. Let’s keep going then. We’re going
to start to get into some additional interesting metrics here.
So number six, debt-to-asset ratio, which compares,
basically at the end of the day, what a school owns against
what it owes or, in other words, the amount of liability
[inaudible] school relies on borrowed funds to finance its
operations. You’ll need a school’s audited balance sheet for
this particular measure, and as we move through the
standards, a debt-to-asset ratio greater than 1.0 is a
generally accepted indicator of potential long-term financial
issues, as really, fundamentally, the school owes more than
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National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—17
it owns, which is a pretty risky financial position for an
organization to be in. A ratio of less than 0.9 indicates a
financially healthy balance sheet—both in its assets and its
liabilities—and also, by extension, its equity or net asset
accounts.
Let’s see. How is our school doing? If you take a look, the
third calculation down under the analysis section, debt-to-
ratio against the standards here, does it meet standard,
does it not meet standard, or does it fall far below standard?
TAMMIE KNIGHTS:
Ben, it looks like there’s been several questions in the chat
that maybe we could take a look at.
BEN AASE:
Yeah. [pause] [The] results are in, and it looks almost
unanimous—school meets the standard, and you are
correct. It looks good, looks as though the school really
shows little leverage or reliance on debt to finance its
operations. Let me pause here and take a look at some of
these questions that are floating across the webinar screen
here.
Interaction between operating and capital budget in
evaluating margin. In evaluating margin, you would look at
operating budget or operating results, which, and when I say
that should include the current, let’s say the current portion
of any long-term or capital spending implications. So you
might have a capital budget that’s multiyear and then within
your current [inaudible].
Let’s see. Would the ratio be different if the school owned its
own real estate? The ratio itself—the calculation and the
results—could be different, but it should still give you a
decent capture and a good reflection of debt-to-asset ratio,
so I would not necessarily advocate that the standards
necessarily change. But this can be and should be applied in
circumstances where schools do or do not own their own
real estate.
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—18
Now, let’s see. I see you have a question about taxonomy
and language, which certainly comes up at a lot of points.
Brian here points out, someone pointed out to me that
schools don’t make profits but accumulate surpluses or
deficits, so we have to start calling it a surplus margin.
I would welcome whatever language, whatever taxonomy
sort of works for your culture and your organization. I don’t
know that there’s a specific answer to that question per se,
except that I tend to use the language interchangeably, but
you want to be cognizant of your audience, their context,
their understanding [inaudible] that’s growing every year.
There is—I mean at the end of the day—you basically just
want to know what the story is behind that. Why is it that the
school is moving away from using its own assets or equity
as a capital structure for the organization and why is it taking
on more debt? There’s good debt and there’s bad debt. At
the end of the day, you want to make sure your school is
appropriately using and growing those debt instruments that
are actually going to help the organization—sort of prosper
in a positive way versus taking on debt for the wrong
reasons. Those are sort of the top-level fundamental
questions that I would probably ask at the outset.
Let’s see here. [pause] Ah, good question about
depreciation expense being removed in calculating profit
margin. I would advocate that no. If you were looking, if you
were really trying to get at a cash measure, I might say yes,
but, generally speaking, industry standards, whether you’re
talking about, let’s even just expand to the nonprofit sector,
most financial advocates would say that both budgeting for
and considering depreciation expense, even though it’s a
noncash expense, is a healthy practice because that’s also
a way in which you can build up accumulated capital to then
help reinvest in some of those assets that are depreciating
over time. So I think from my standpoint and our firm’s
standpoint and the number of folks in the industry, that you
want that margin to include or allow for depreciation for that
reinvestment.
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—19
If it’s all right, I’m going to—
WHITNEY SPALDING SPENCER:
Ben, actually, there was one more question I think we
missed that I believe was probably related to the total
margin measure. What do we do if we don’t have three
years of audited statements yet?
BEN AASE:
Oh, great question. If you do not have three years of
statements, and I think the conversation, the conversation is
just a little bit different, and you’re less able to make,
perhaps, draw the same conclusions or tell the same depth
of story. But it serves as a starting point for our conversation
about what that trend might look like going forward. So I
guess that would be my answer to that question.
WHITNEY SPALDING SPENCER:
I think what the framework also incorporates—actually says
in order to meet the standard—schools in their first or
second year of operation have to have a positive total
margin. In those early years, you want to make sure that it’s
positive, even though you can’t calculate [it] over the three-
year period.
BEN AASE:
Exactly. I am going to… I’d like to move us through the
material. I see a question here from Jacquelyn, which is a
great question: “How do you evaluate or implement this kind
of framework in the context where you might have a
management contract or a for-profit company that has its
own sort of set of books, et cetera?” That’s a great question,
somewhat of a complicated one. What I’d like to do,
Jacquelyn, is move through the material and if, for some
reason, we aren’t able to get into a discussion here—we’ve
certainly worked within that context, and we’ve worked in
how you might adapt for that.
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—20
All right; just two more to go. Cash flow: This indicates a
trend in a school’s cash balance over a period of time. It’s
similar to day’s cash on hand but really from a longer-term
vantage point. Since cash flow fluctuations from year-to-year
can have a long-term impact on a school’s financial health,
this metric assesses both multiyear cumulative cash flow as
well as annual cash flow. Again, offering you that
complementary, slightly deeper perspective by looking at not
just a current period or [a] past, prior period but looking at
trends over time.
The preferred result is pretty basic. It’s greater than zero,
right, indicating increasing financial health and [a] positive
development of cash balances. You will need three years of
audited balance sheets to run your calculations, so I would
offer the same response in terms of depending on what year
the school might be. You’re starting to build that body of
data and evidence, so go back as far as you can, but, at a
minimum, you’ve also got complementary cash measures in
here. If this is the case, in which the near-term indicators are
probably going to be more relevant and useful for your
particular situation.
Let’s see; I want to just ask the question. If we go back to
the case study here, “Does our school meet the standard,
does it [inaudible] section?” [pause]
[Let’s] take a look at the results here. Okay. Three quarters
of you feel that the school meets the standard, and I would
agree with you. Even though the school saw a negative cash
trend in the first of the three years measured here, its
multiyear cumulative cash flow is positive, and cash flow is
positive in two of the three years. And also, I should say,
cash flow in the most recent year is also positive. So this
school does meet standard in that regard.
Slide 16
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—21
Last but not least, debt service coverage ratio. This
measures whether or not a school can pay [inaudible]. Now
note that depreciation expense is added back to the net
income within the calculation because it is a noncash
transaction, and interest expense is added back to the net
income because it is one of those [things] that the school is
wanting to be able to or trying to pay, which is why it’s
included in the denominator there. You are going to need a
few data sources for this one.
Net income or total margin you’ll find in the audited income
statement. Depreciation expenses you’ll find on the audited
cash flow statement. And interest expense you’ll find on
either the audited income statement or the cash flow
statement. Annual principal and interest obligations would, in
most cases, need to be provided by the school. It’s a piece
of data that oftentimes you will not necessarily find within the
audit and financial statements itself.
Debt service coverage ratio is pretty commonly used as a
debt covenant measure across a lot of industries. Most
typically you’d probably see a ratio of 1.1 or greater as being
a threshold for identifying organizations healthy enough to
meet those obligations—the annual principal and interest
obligations—but still want to make sure that we cover this
ratio and some of the elements that feed into it.
Slide 17
All right; let’s take a step back, if that’s all right then. We’ve
got just a few minutes left on the webinar here and want to
take a step back and return to some of the context here. The
targets used in these measures are generally based on
industry standards for determining a school’s financial
health. I’d say recognizing that standards within the charter
school specific subsector are really just starting to, I guess I
should say perhaps are in a fairly nascent stage. And they
dictate—let’s call it an initial rating for schools based on
audited financial information.
That being said, you should be mindful of unique
circumstances and state laws that may require modification
Slide 18
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—22
to the framework. I recognize many of you on this webinar
are not authorizers, and you may see other useful ways in
which you could use this information—be it for internal
management, perhaps for [the] development of a dashboard
or a scorecard for board reporting purposes or whatever it
might be. But at its core the framework does a provide
means to evaluate whether current and continued
investment in a school is a responsible and, I’d say, a
beneficial use of public funds. So [if there are] any
modifications, I guess I’d just suggest should be made with
that purpose in mind.
Back to our case study. Just as we step back and think
about what we learned about the Academy for Technical
Education here, let’s think about—“Does the school meet
the standards?” I’m not going to go to a poll on this. I’m just
going to reflect on it for just a minute here. “What have the
schools [inaudible]?” The way I want to do that is—really the
big question, What does all this add up to, right?
Slide 19
First off, I’d say the schools that fail the near-term indicators
are at a high risk for financial distress or closure. There we
go.
As such, they require additional monitoring and/or corrective
action, so authorizers or other individuals should determine
the severity of the problem, assess changes in the school’s
financial performance and health since the date of the
audited financial statements or whatever data you’re using,
and require that the school take actions to stabilize that
financial position.
Now, schools may be failing on the sustainability indicators
for multiple reasons. They may be trending toward financial
distress or they could have a sound rationale for failing to
meet the standards in a given year. For example, a school
that’s otherwise, let’s say, financially sound could fail to
meet the cash flow measure if it made a one-time large
capital investment. So authorizers or other stakeholders
need to determine if the school’s failure to meet the standard
Slide 20
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—23
was a result of a one-time event or if it represents an
underlying structural problem with the school’s financial
performance. To this end, authorizers should collect and
analyze additional information from the school and perform
more in-depth due diligence.
All that being said, within the context of our framework, the
position and the guidance here is that if a school receives
two or more ratings of does not meet standard or one or
more ratings of falls far below standard, based again on the
initial analysis of the school’s audited financial statements,
we’ve recommended that authorizers should conduct a more
comprehensive review of the school’s finances. Additional
intervention: It could be in the form of a notice of
unsatisfactory performance, increased monitoring,
[inaudible] your financial check-ins, or requests for additional
information.
So, you know, and really in conducting additional analysis,
you should consider requesting current financial information
in addition to the audited information. Examples include a
current balance sheet, budget variance report, current cash
flow projection—things of that nature. Or you may want to
request additional information that’s specific to whatever
standard the school perhaps failed to meet.
Again, the point here is that the framework provides an
objective starting point for a conversation about a school’s
financial health. In the corresponding guidance, it includes
examples of additional information that you could request as
part of a comprehensive review and also what to look for in
the additional data to identify signs of progress toward a
more financial ongoing basis.
With that, I know we have only a few minutes left here, and I
was hoping that Whitney could close out with a couple of
contextual comments bringing it all back to the context of
financial performance and its impact on high-stakes decision
making.
Slides 21 and 22
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—24
WHITNEY SPALDING SPENCER:
Yes, I want to talk—this largely comes from an authorizer
perspective—but I think it’s helpful for folks who are involved
more at the school level to think about, “How would my
authorizer use this; how would they judge me based on this
information?”
So just a few key points here. I’d say, number one, if you’re
an authorizer evaluating a charter school, academic
performance is going to be the primary driver for your
decision making. Financial performance is important, and
schools should be financially healthy. But, number one, an
authorizer needs to see if the school is performing
academically. If they’re not, they could be cash flush and be
doing great financially. That doesn’t mean that they should
continue to operate as a charter school. If they’re teaching
kids, we have a serious problem.
What we’ve seen is often that schools that don’t have
money—that aren’t performing well financially–are going to
end up closing themselves. We think it’s very important for
an authorizer to be tracking a school’s finances, letting them
know when they’re not meeting the standards and when
they think there’s a concern, asking them to come up with
plans to become financially healthier. But at the same time,
it’s not often that an authorizer has to say, “You’re doing
great academically, you’re doing great organizationally, but
we’re going to close you just because you didn’t quite meet
some of those financial standards.” For the most part, if a
school’s really struggling financially, they’ll either close
themselves or the authorizer might close them just shy of
that point so that there’s less disruption in the school.
The next is that authorizers should be on their toes and so,
you know, just that it doesn’t matter. The authorizer really
needs to be tracking the school’s financial performance
closely so that they’re very aware if a school is trending
negatively, headed toward the point where they might
actually run out of money. The authorizer needs to be on
their toes and ready to help that school with a close out, if
Slide 23
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—25
necessary. Obviously, throughout the process they should
be letting schools know how they’re doing so that schools
are very aware that, hey, I’m headed to a bad place right
now. And if the school ultimately does have to close, that the
authorizer is prepared to help transition those students and
the assets.
But in terms of thinking about the situation where a school is
great academically and struggling a little financially, as I
said, most of the time an authorizer is not going to move for
revocation for that. However, if a school is not doing great
academically, not doing great financially, not doing great
organizationally, it can sort of be part of death by a thousand
cuts. So it just becomes yet another reason why perhaps the
school should no longer have a charter and might be
considered for nonrenewal or revocation.
So just kind of thinking about the big picture. As Ben
mentioned earlier, what happens when a school has yellow
or red flags, they get does not meet standard, [or] they get
falls far below standard, some authorizers we’ve worked with
that we’ve met with their schools and the schools say, “Oh
my gosh. I got a red. Does that mean that the authorizer is
going to close me this year?” And that’s where we say it’s
not, that’s not generally what we’re looking at. Most of the
time unless a school is just completely broke to the point that
they’re not going to be able to continue quality operations, it’s
only a piece of the picture in decision making. So just wanted
to make sure that was clear because it’s something we
certainly heard a lot from schools, is this concern that we
might not make every, meet standard on every measure, but
that isn’t always uncommon.
I think we are actually at time, and I know I’ve been watching
the chat box, and there have been a lot of really great
questions. I think what we’re going to do and, Ben, correct
me if I’m wrong, is we can probably respond to some of
these in writing and send an e-mail out to everybody who
attend[ed] the webinar so that you can hear our responses
on this. Does that work, Ben?
National Charter School Resource Center Performance Management: Analyzing and Monitoring Charter School Finance—26
BEN AASE:
Yeah. No, I love all the questions. And I’d like to make sure
we can address them in some way, so I’d like to assemble a
little team here. We’ll compile those and get some written
responses distributed. I’m also thinking also we could
include some, point you toward hopefully some helpful
resources to wrestle through some of these. I appreciate the
amount of limited dialogue we were able to get today but
would like to commit to doing that.
WHITNEY SPALDING SPENCER:
Great. Thank you everybody for participating in the webinar.
As I see many of you are already responding, we have put
up a survey question just to see how did we do today, did
you learn something, do you feel like you know more
analyzing and monitoring charter school finance? We hope
you do, but we would love your feedback, so that we can be
more effective whenever we’re training people in the future.
Slide 24
TAMMIE KNIGHTS:
And I want to thank Ben and Whitney for taking their time
today to share this resource with us, and we will be posting
the webinar on the National Charter School Resource
Center website—for folks who want to share this with other
people—by the end of the week, as well as sending out the
e-mail again to invite you to reach out to NACSA to get all of
the documents. With that said, we also have an additional
survey that we hope that you will complete before you go to
help inform us in terms of how to provide the best quality
resources for you.
BEN AASE:
Thank you everybody who participated.